Handout No. 3
Handout No. 3
Problem No. 1
Presented below is a list of items that may or may not reported as inventory in a company’s December 31 balance sheet.
1. How much of these items would typically be reported as inventory in the financial statements?
a. P3,450,000 c. P3,390,000
b. P3,000,000 d. P3,330,000
2. In auditing inventories, a major objective relates to the existence assertion. Of the following audit procedures relating
to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper arrangement of goods,
separation of consigned goods, and limits on movements of goods during inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.
3. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence
that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.
Problem No. 2
The following accounts were included in the unadjusted trial balance of Veritas Company as of December 31, 2020:
Cash P 481,600
Accounts receivable 1,127,000
Inventory 3,025,000
Accounts payable 2,100,500
Accrued expenses 215,500
During your audit, you noted that Veritas held its cash books open after year-end. In addition, your audit revealed the
following:
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1. Receipts for January 2021 of P327,300 were recorded in the December 2020 cash receipts book. The receipts of
P180,050 represent cash sales and P147,250 represent collections from customers, net of 5% cash discounts.
2. Accounts payable of P186,200 was paid in January 2021. The payments, on which discounts of P6,200 were taken,
were included in the December 2020 check register.
3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following information has been found
relating to certain inventory transactions.
a. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory
figure.
b. Goods costing P108,750 were received from a vendor on January 4, 2021. The related invoice was received and
recorded on January 6, 2021. The goods were shipped on December 31, 2020, terms FOB shipping point.
c. Goods costing P318,750 were shipped on December 31, 2020, and were delivered to the customer on January 3,
2021. The terms of the invoice were FOB shipping point. The goods were included in the 2020 ending inventory
even though the sale was recorded in 2020.
d. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-
end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2021. The sale was
properly recorded in 2021.
e. The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2020. The
related goods, shipped FOB destination were received on January 4, 2021, and thus were not included in the
physical inventory.
f. Goods valued at P306,400 are on consignment from a vendor. These goods are not included in the physical
inventory.
Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31,
2020:
1. Cash
a. P481,600 c. P334,300
b. P340,500 d. P346,700
2. Accounts receivable
a. P1,454,300 c. P1,127,000
b. P1,282,000 d. P1,274,250
3. Inventory
a. P3,017,500 c. P2,930,000
b. P3,040,000 d. P2,505,000
4. Accounts payable
a. P2,395,450 c. P2,286,500
b. P2,307,950 d. P2,301,750
5. Current ratio
a. P2.00 c. P1.84
b. P1.83 d. P2.01
Problem No. 3
The Trading Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory accounts
at December 31, 2019, had the following balances.
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The following are some of the transactions that affected the inventory of the Trading Company during 2020.
Jan. 8 Trading Company purchased raw materials with a list price of P200,000 and was given a trade
discount of 20% and 10%; terms 2/15, n/30. Trading Company values inventory at the net invoice
price
Feb. 14 Trading Company repossessed an inventory item from a customer who was overdue in making
payment. The unpaid balance on the sale is P15,200. The repossessed merchandise is to be
refinished and placed on sale. It is expected that the item can be sold for P24,000 after estimated
refinishing costs of P6,800. The normal profit for this item is considered to be P3,200.
Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.
Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.
Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400.
A reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to
be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.
Based on the above and the result of your audit, answer the following: (Assume the client is using perpetual inventory
system)
Problem No. 4
During your audit of the records of the Good Corporation for the year ended December 31, 2020, the following facts were
disclosed:
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March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – October 45,000 20.40 918,000
November – December 60,000 20.80 1,248,000
265,000 P5,232,800
Units
Explanation 1/1/20 12/31/20
Raw materials 35,000 ?
Work in process (80% completed) - 25,000
Finished goods 15,000 40,000
Sales, 200,000 units
c) Raw materials are issued at the beginning of the manufacturing process. During the year, no returns, spoilage, or
wastage occurred. Each unit of finished goods contains one unit of raw materials.
Based on the above and the result of your audit, answer the following:
4. The cost of goods sold for the year ended December 31, 2020 is
a. P16,897,000 c. P14,077,000
b. P14,161,400 d. P13,911,400
Problem No. 5
The Merilon Merchandising Company is a leading distributor of kitchen wares. The company uses the first-in, first-out
method of calculating the cost of goods sold. The following information concerning two of the company’s products is
taken from the month of May:
PANS KETTLES
No. of Unit No. of Unit
units cost units cost
May 1, beginning inventory 10,000 P 60 6,000 P 40
Purchases:
May 15 14,000 65 9,000 P 42
May 25 6,000 75
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On May 31, Merilon’s suppliers reduced their price from the last purchase price by the following percentages:
Pans…………………..25% Kettles…………………20%
Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.
Merilon Merchandising Company’s selling costs are calculated at 10% of selling price. Both products have a normal profit
of 30% on sales prices (after selling costs).
Based on the above and the result of your audit, answer the following:
5. The cost of sales, before loss on inventory write down, for the month of May is
a. P1,778,000 c. P1,797,700
b. P1,685,600 d. P1,658,000
Problem No. 6
Armildez Company began operations in 2015. On July 15, 2020, a fire broke out in the company’s warehouse destroying
all inventory and many accounting records. The following information was assembled from the microfilmed records. All
sales and purchases are on account.
The following is a summary of prior year’s sales and gross profit on sales:
1. What is the entity’s average gross profit ratio based on its prior year’s sales?
a. 26% c. 30%
b. 34% d. 29%
2. What is the Company’s total sales for the period January 1 to July 15, 2020?
a. P1,504,200 c. P1,765,380
b. P1,511,000 d. P1,768,780
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3. What is the Company’s total purchases for the period January 1 to July 15, 2020?
a. P905,580 c. P1,044,420
b. P912,170 d. P1,009,670
4. What is the Company’s estimated inventory on July 15, 2020 before the fire?
a. P186,605 c. P146,930
b. P244,430 d. P279,180
End of Material
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